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Monday 28 July 2014
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Bank on banks for better returns

Dilip Maitra

With bad news all around on the economic front, people today are confused and worried about where to invest their money and how to get a reasonably good return without the fear of losing it. Well, for the risk averse investors choices are limited, while for the brave hearts, there are many options depending on their risk appetite.  

Though no one can correctly predict how the stock markets will behave, interest rates will move and rate of inflation will climb, amidst the uncertainty, we must plan for an investment strategy that is likely to be effective in providing a reasonable return.

Different needs


In the world of investments, there is no “one size fits all”. Investors have different goals, needs, risk appetite and time horizons. Ideal investment strategy should be worked out in line with the investor’s risk profile and time horizon. In every investment options discussed below, risk and time span for investment will vary from person to person.

For those who want to play safe, the best option in 2012 will be the term deposits in banks. Interest rates in bank fixed deposits (FDs) started rising from the middle of 2010 as the Reserve Bank of India (RBI) went on increasing policy rates from March  2010. To contain inflation, the RBI has raised rates 13 times by 425 basis points (bps) and, as a result, FD rates reached  close to 10 per cent towards the end of last year. But it is almost certain that such a high rate is unlikely to continue and investors will be wiser if they rush to banks now. In fact, there are enough indications that the RBI will soon cut interest rates as the food inflation has dropped sharply. The RBI Governor D Subbarao was recently quoted as saying, “From here on, we could expect reversal of monetary tightening.” Canara Bank Chairman and Managing Director S Raman was also of the view that interest rates will soon soften. “We have reached the peak of the interest rate cycle and there are strong possibilities that rates will come down from here.” In fact, last week, in a symbolic move, a PSU bank, Union Bank of India lowered the minimum lending rate by 10 bps, first time any bank did so in the last 30 months.

Even the idle money kept in savings bank accounts can earn more as several banks are now offering much higher interest rates following RBI’s consent. Some banks are now offering savings account interest as high as 7 per cent compared to the earlier 4 per cent. To attract more deposits from non-resident Indians, banks have also raised interest rates on NRE deposits. Many PSU banks are now offering up to 9.50 per cent interest against only 3.80 per cent earlier. Surely, for the proactive investors keeping money in banks can be much more fruitful now. Banks are even better than post office savings schemes where interest rates are lower.

Another interesting fixed income instrument is the Long Term Infrastructure Bonds introduced last year by some infrastructure financing companies. Under this scheme, one can buy infrastructure bonds for 10 years to earn interest at around 8.50 per cent. These bonds are listed and traded on stock exchanges and can be sold and purchased like shares. The more interesting feature is that on an investment of Rs 20,000, an investor can save tax up to Rs 6,000 under the section 80CCF of the IT Act, giving an effective yield of around 11 per cent at the highest tax slab.

Rewarding yet risky

If you do not mind taking some risk in life and want to become rich quickly, then investing in carefully picked equity shares of companies is the option.
How will the stocks behave in 2012 after a dismal performance in 2011? Expert opinions are widely divergent. The year 2011 was one of the worst years in the history of Indian stocks as the BSE Sensex lost 4,823 points and NSE Nifty lost 1,443 points, both dropping by a 23 per cent. On the whole, the investors lost a whopping Rs 19 lakh crore in 2011. The IPO market was doomed as 29 out of 39 public issues are trading at a discount ranging between 10 to 90 per cent. IPO issues too saw a wealth erosion of Rs 4,000 crore. Even the foreign investors are not bullish on the India story any more as they pulled out $500 million of investments in Indian stocks in 2011 as against a net investment of $29 billion in 2010. The sharp fall in the value of the rupee against the US dollar made things worse for foreign investors as the BSE Sensex lost 36 per cent in market cap.

Viewed in this perspective, it is unlikely that the stock market will be bullish. “It is a classical bear market where all news is bad news,” said First Global director Shankar Sharma. “I don’t think the bear market will get reversed in the next six months. The prolonged bear phase may continue for the next one or two years.” However, there are others like BNP Paribas Asset Management Chief Investment Officer Anand Shah who thinks the key indices will be up 10 per cent this year.

To be fair, the markets were bad also because of the international disturbances like  European financial crisis, tsunami in Japan, slower economic recovery in the US and high oil prices. These  dampened investors’ sentiment, made large foreign investors jittery and plunged stocks in all major markets. Despite a temporary lull, the European financial crisis is far from over, the economic scenario in the US is not encouraging and above all, the Chinese growth machine is slowing down. Add to it our own problems. The Indian economy is expected to grow at a slower rate of 7 per cent, business is finding it difficult to invest in new capacity due to high interest rates, rate of inflation is still high, the government does not know how to fill the huge gap between its expenditure & receipts and the large trade gap (import bill over exports) is expected to keep value of rupee depressed. Though the stock market does not look very promising on the whole, investors can still make money by picking up some blue chip stocks now available at a bargain. But one must follow the basic rules: avoid speculative investments based on market tips, invest for long term (at least two years), do proper homework, study the company as well as the industry it operates in and check the future market and technology trends.

One can also  go for growth stocks that have good future potential due to strong fundamentals. “From a valuation perspective, small and mid cap stocks are very attractively valued with better upside potential. This segment has an opportunity for investment and can potentially provide superior long term risk adjusted returns to investors,” said Nimesh Shah CEO of ICICI Prudential AMC.

Will gold shine again?

Indians are obsessed about gold and buy a lot of it in the form of jewellery. The yellow metal certainly did well as an investment option as it gave 12 per cent return in 2011, its tenth straight annual gain. Though the gold price is almost 20 per cent lower now from its 2011 peak, it is difficult to predict if one will get a positive return in 2012 too. Interestingly, the price of gold not only depends on the demand for it from the actual users, but also moves widely due to speculators’ positions who move to gold when dollar weakens. Since the financial crisis in Europe is unlikely to be resolved soon, gold prices may fluctuate in 2012 on speculative buying. On the long run, gold is a sure winner and should you decide to invest in gold, buy coins rather than jewellery whose price includes making charges (approximately 15 per cent) that can’t be recovered while selling.

Mutual funds

Mutual Funds (MF) collect money from large number of investors buying units of a scheme and invest the fund according to the pre-stated plan. Since investment managers in an MF are experts in stock picking, it is better to invest in MFs than investing directly. But one can still lose money in equity funds where returns are linked with stock markets. In 2011, a recent study showed that all 171 diversified funds gave negative returns, while 58 per cent performed better than BSE Sensex which lost 23 per cent and 42 per cent lost more than Sensex. To invest in mutual funds, one must have a long term view and do a thorough research.

DH News Service

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